Mishra's Textbooks Ltd. (MTL) buys and sells used textbooks to university students. MTL is located in a strip mall just off a university campus. Arjun Mishra formed MTL in April 2016. It's now May 2017 and MTL has just completed its first year of operation. Arjun's bookkeeper has prepared an income statement for the year based on cash paid and received during the year:

Arjun is pleased with MTL's performance for its first year with net income of $99,000, but he's concerned that everything hasn't been done correctly, so he'd like you to have a look at it. You talk with Arjun and his bookkeeper and obtain the following information:
• Revenue includes a $50,000 bank loan and $100,000 contributed by Arjun when the corporation was formed.
• Of the used books purchased from students, $109,000 were sold during the year.
The rest are on hand and available for sale in the future.
• The furniture and fixtures were required to set up the store and include shelving, counters, computers, signs, and so on. Arjun estimates the furniture and fixtures will have useful lives of about five years.
• At the end of the year, MTL owed employees $1,100.
• When reviewing the inventory on hand at the end of the year, Arjun realized that about $5,000 of the books were obsolete and couldn't be resold.
• The rent expense includes $2,000 paid in advance for May and June 2017.
• The bank loan was arranged on May 1, 2016 and carries an interest rate of 8 percent.
The annual interest payment was paid on May 1 (after the year-end).
• MTL received $10,000 from the student association of a college to provide it with certain used textbooks. MTL is to deliver the books in August 2017 and must refund the money if the order isn't fulfilled. MTL hasn't begun acquiring the books yet.

a. Use the information provided to revise the income statement so that net income is determined on an accrual basis. Also prepare a balance sheet as of April 30, 2017.
b. Explain to Arjun the difference between the two income statements and what each one tells him.
c. Evaluate MTL's performance and financial position using the information you'veprepared.

  • CreatedFebruary 26, 2015
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